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There’s a lot of talk about the ‘missing middle’ in India – businesses that are too small to receive loans from commercial financial service providers, and too large for support from many traditional microfinance institutions. But what about the ‘missing’ female small business owners? India’s micro, small & medium enterprises (MSMEs) represent nearly 58 million businesses, create 150 million jobs, and account for 45 percent of industrial output. Of these MSMEs, only around 10 percent are owned by women, yet women entrepreneurs form a vital segment of this sector. In fact, research by Goldman Sachs has shown that women are more likely to use their earnings and increased bargaining power to buy goods and services – which, in turn, creates a productive cycle that fuels economic growth. If we recognize the implications of this research, why are there still so few women-owned MSMEs in India? What can be done to help unlock the full potential of female entrepreneurship throughout the nation?

As with the rest of the MSME sector, access to finance is the most critical barrier to entry and business growth for women-owned MSMEs. According to an IFC report, lending to women-owned MSMEs as a separate segment is still unexplored in India due to lack of segmental focus on women.

To better understand how to improve outreach and financial service offerings to women entrepreneurs, Accion recently partnered with the Indian School of Business, Hyderabad to conduct focus group discussions in Chennai, Tamil Nadu with 22 women entrepreneurs who were graduates of the Goldman Sachs 10,000 Women initiative. The discussions aimed to understand the experiences of women entrepreneurs in accessing funding for their business and identify any financial barriers faced by women-owned MSMEs. Results of the focus groups will help inform Accion partners’ Swadhaar and RBL’s new business focused on MSMEs to design more appropriate products and channels for this market segment.

So what did we learn?

Across the board, women entrepreneurs indicated that owning and operating a business gives them confidence, a sense of independence, greater, social recognition and increased financial stability for their families. Participants were self-motivated and eager to expand their businesses. In terms of business financing, their needs are quite similar to any other MSME: larger loan amounts with lower interest rates and fees, longer loan tenures, hassle-free loan processing, and quick disbursement. Yet the women reported experiencing unique challenges and biases compared to male counterparts when trying to access loans to fund their young businesses:

Unfavorable perception of control: financial institutions approached doubted who actually runs the enterprise – the woman or her husband.

Negative perception of stability: financial institutions view single women to be of higher risk as they are expected to move residences once married and there’s a perception that women-owned businesses shut down more easily when faced with challenges.

Lack of adequate collateral: access to collateral is difficult for women entrepreneurs due to legal obstacles such as unfavorable inheritance and property rights. Often property is in the man’s name, or the women have to ask permission from family members to provide property as collateral.

Cumbersome and inflexible processes to access the loan: some institutions require a spouse to become the co-borrower and loan documentation requirements are lengthy with long processing times. Once married, any change to a woman’s name must be reflected in all documentation.

About 70 percent of women participating in the focus groups indicated they had approached a bank for funding to start their business but were denied, as banks are reluctant to lend to startups. Consequently, the women entrepreneurs were resourceful in finding alternative ways to get seed financing for their business ideas such as:

Taking out what’s known as a ‘jewel loan’: Around 60 percent of the participants had turned to a “jewel loan” facility, whereby jewelry is used as collateral for the loan. Jewel loans are easy to obtain, processed quickly, and require few documents. Women usually own and possess the collateral (gold), and repayment is due only at the end of term, aligning with the cash flow constraints of a start-up business.

Borrowing from friends, family, own funds: when possible, some participants looked to personal savings and informal funding sources, like their spouse, family, and friends.

Borrowing from public sector banks: participants indicated they felt that public sector banks are more customer-friendly, bank staff have a good understanding of the MSME business, and loan application processes are more flexible compared to private sector banks.

What can we learn from these initial findings? While it’s still early in the research process, there appear to be opportunities for financial service providers to make capital for women-owned MSMEs more accessible by accepting alternative forms of collateral and making loan application processes less cumbersome. A greater focus on staff training on MSME business specificities and sensitization on gender biases may also go a long way in changing negative perceptions of women-owned businesses to ultimately create a more welcoming business environment for female clients. Accion will be looking into these questions and more as we expand the focus groups in other regions throughout India such as Delhi, Mumbai, Pune, Hyderabad, and Bengaluru.